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Income Tax Appellate Tribunal, DELHI BENCH “B”: NEW DELHI
Before: SHRI AMIT SHUKLA & SHRI O.P. KANT
The aforesaid appeals filed by the assessee against final assessment order dated 16.9.2010, passed in pursuance of directions given by the Dispute Resolution Panel, New Delhi, vide order dated 10.8.2010 for the assessment years 2005-06, 2006-07; and against order dated 2.11.2011, passed in pursuance of directions given by the DRP’s order dated 1.8.2011 for the A.Y. 2007-08. Since the issues involved in all the three appeals are common arising out of identical set of facts, therefore, same is heard together and disposed of by this consolidated order.
We will first take up appeal for the assessment year 2005-06. The findings given therein will apply mutatis mutandis in the appeals for A.Y.s 2006-07 and 2007-08 as identical facts and circumstances are permeating. In the grounds of appeal assessee has challenged following issues:- Firstly, validity of reopening of assessment u/s 147; Secondly, directions of the DRP that the assessee was having business connection in India in terms of section 9(1); Thirdly, directions of the DRP that assessee has dependent against Permanent Establishment (PE) in the form of ESPN Software India (P) Ltd. under the India Mauritius Double Taxation Avoidance Agreement (DTAA/Treaty); Fourthly, direction of the profits of the assessee from Indian operations @ 30% at the gross revenue and; Lastly, charging of interest u/s 234A and 234B and 234C. Apart from that, assessee has also raised additional grounds in all the above assessment years impugned before us, whereby the assessee has challenged the validity of the draft assessment order on the ground that assessee is not an “eligible assessee” within the meaning of section 144C (15)(b). The relevant additional ground reads as under:- “In the circumstances of the case and in law, the appellant not being an ‘eligible assessee’ within the meaning of section 144C(15)(b) of the Act, the learned Assessing Officer erred in passing invalid draft order and thereafter issuing an order which was barred by limitation.”
3. Before us, Ld. Sr. Counsel Shri Porus Kaka addressing on the issue raised in the additional ground, submitted that the assessee is non-resident entity, which is a ‘partnership firm’ established under the laws of Mauritius and is a tax resident of Mauritius which is evident from the residency certificate dated 19.6.2002. The assessee is engaged in the business of selling advertisement time and programme sponsorship in connection with programming via non-standard television from Mauritius. ESSM Software India (P) Ltd. is a separate company incorporated under the laws of India which is engaged in the business of purchasing the ad time from the assessee and selling it to various Indian advertisers and advertising agencies in India. The sale of Ad time by the assessee is outside India and receives the sale consideration outside India only. The assessee neither has any office nor any operations in India. Drawing our attention to the impugned assessment order, he submitted that AO himself has noted that assessee had entered into international transaction with its AE for which reference was made to the TPO u/s 92 CA (1) on 18.9.2008, who vide his order dated 7.9.2009, did not draw any adverse inference and no TP adjustment has been made with regard to the international transaction. Once that is so, then forwarding of a draft assessment order as provided in sub section (2) of section 144C, which is required only in the case of “eligible assessee” wherein the order has been passed by the TPO u/s 92CA making any adjustment, would not be applicable in the case of the present assessee. Here in this case the Ld. AO has passed the draft assessment order vide order dated 28.1.2010 even when there was no transfer pricing issues involved. Therefore, such an order passed is bad in law in view of the provision of section 144C (15). He pointed out that in exactly similar case of sister concern, i.e., in the case of Ess Advertising (Mauritius) S.N.C.ET Compagnie vs. DCIT reported in 2018 93 taxmann.com 53, this Tribunal on similar additional ground raised for the first time not only admitted the said ground, but also had quashed the said draft assessment order and consequently the final assessment order and the matter was decided in favour of the assessee. He further pointed out that now this issue also stands covered by the judgment of Hon’ble Delhi High Court in the case of ESPN Star Sports Mauritius S.N.C. ET Compagnie v. Union of India (2016) 388 ITR 383. Not only that, now there is another decision of Hon’ble Delhi High Court again in the case of sister concern only, in Ess Distribution (Mauritius) S.N.C.E.T. Compagnie vs ACIT, since reported in (2017) reported in 399 ITR 362 (Delhi High Court). In all these cases it has been categorically held that AO has erred in law in passing the draft assessment order u/s 144C(1) not withstanding that assessee was not an “eligible assessee” because, no transfer pricing adjustment was made in terms of 92CA(3). He also drew our attention to these judgments placed in the paper book before us. Thus, he submitted that now this issue stands squarely covered, whence there is no transfer pricing order / adjustment u/s 92CA(3), then no order could have been passed in terms of section 144C(1) read with section 144C 15(b) and hence the impugned order deserves to be quashed.
4. On the other hand Ld. CIT (DR) submitted this issue was not taken before the DRP and therefore, if such ground is entertained for the first time, then matter should go back to the DRP.
5. We have considered the rival submissions on the issue of additional ground raised by the assessee before us and also the material referred to and the judgments in support of the said ground. All the additional grounds in the impugned assessment years involve purely a legal issue which goes to the very root of the validity of the assessment passed u/s 144C (1) and for adjudication of such an issue no new facts or material is required to be examined or investigated. Therefore, such an additional ground is admitted. For admission of such a legal ground, we are supported by the judgment of Hon’ble Supreme Court in the case of National Thermal Power Co. Ltd. vs. CIT (1998) 229 ITR 383 (SC).
As stated above, the assessee is a non-resident entity which is a partnership firm incorporated under the laws of Mauritius and is also a tax resident of Mauritius. It had filed its return of income shown ‘nil’ income on 31.10.2005 which was duly processed u/s 143(1) on 18.3.2006. Thereafter, assessee’s case was reopened U/S 147 vide notice dated 10th June, 2008 issued u/s 148 and in pursuance thereof, draft assessment order was passed/ proposed u/s 144C (1). In the impugned draft assessment order, but has even noted the following facts:- “As the assessee had entered into international transactions with its associated enterprise, a reference was made to Transfer Pricing Officer u/s 92CA(1) on 18.9.2008 who vide his order dated 7.9.2009 did not draw any adverse inference in respect of the international transactions.”
After noting down such facts, passing of such a draft assessment order in absence of any order passed u/s 92CA(3) thereby making any kind of TP adjustment, then provision of section 144C could not have been resorted to, because the assessee cannot be reckoned as “eligible assessee” in whose case the draft order of assessment is required to be passed. Section 144 C(1) reads as:- “144C. (1) The Assessing Officer shall notwithstanding anything to the contrary contained in this Act, in the first instance, forward 5
a draft of the proposed order of assessment (hereafter in this section referred to as the draft order) to the eligible assessee if he proposes to make on or after the 1st day of October, 2009, any variation in the income or loss returned which is prejudicial to the interest of such assessee.”
The aforesaid provision which is a non obstante clause, provides that the AO has to forward a draft of the proposed order of assessment to the ‘eligible assessee’, if he proposes to make an order after the first day of October, 2009 making any variation in income and or loss returned which is prejudicial to the interest of such assessee. The “eligible assessee” has been defined in clause (b) of sub section 15 which reads as under:- 144C(15)(b) “eligible assessee” means – (i) any person in whose case the variation referred to in sub- section (1) arises as a consequence of the order of the Transfer Pricing Officer passed under sub-section (3) of section 92CA and (ii) any foreign company.” From the conjoint reading of the aforesaid provisions it is quite clear that assessee must be a foreign company in whose case the variation which has been referred and if there is any variation arising out of consequence of order passed by the TPO in terms of section 92CA (3), then only provision of section 144C can be triggered. Here in this case as noted by AO himself, there is no variation as a consequence of any order passed by the TPO as there is no adjustment made in the case of the assessee. We find that in the case of ESPN Star Sports Mauritius SNC ET Compagnie (supra) the Hon’ble Jurisdictional High Court on same issue had quashed such order passed u/s 144C (1) and consequently the final assessment order passed in pursuance of DRP’s direction. The relevant observation and finding reads as under:- “It appears to the Court that it is plain that under section144C, the AO should have proceeded to pass an order under Section 143(3) of the Act. Instead the AO confirmed the draft assessment order passed under section 144C (1) of the Act. This, therefore, vitiated the entire exercise. The Court has no hesitation in holding that the final assessment order dated 28th January, 2015 is without jurisdiction and null and void. The draft assessment order dated 28th March, 2014, having been passed in respect of entities which were not eligible assessee’s is also held to be invalid.”
9. Again this issue had come up for consideration before the Tribunal in the case of assessee’s sister concern, i.e., ESPN Star Sports Mauritius SNC ET Compagnie (supra) wherein on exactly similar facts this Tribunal following the judgment of Hon’ble Delhi High Court had observed and held as under:- “12. We now espouse the first condition, being, ‘any person’ in whose case variation is proposed in the income returned in the draft order consequent upon the passing of an order by the TPO. Though the assessee is ‘any person’’, but admittedly, the TPO has not proposed any variation in the income arising from the international transactions. Thus, it becomes manifest that the assessee has not fulfilled any of the conditions to become ‘eligible assessee’ in terms of section 144C(15)(b). A fortiori, no draft assessment could have been proposed u/s 144C(1) of the Act which has in fact been proposed by the Assessing Officer before passing the final impugned assessment order.
13. The Hon’ble jurisdictional High Court in the assessee’s own case for the assessment year 2010-11, since reported as ESPN Star Sports Mauritius S.N.C.ET Compagnie v. Union of India (2016) 388 ITR 383/241 Taxman.38/68 taxmann.com 377 (Delhi), has allowed the assessee’s writ petition under similar circumstances by setting aside the draft assessment order and the final assessment order with the following observations made in para 30, which are as under:- “It appears to the Court that it is plain that under Section 144C, the AO should have proceeded to pass an order under Section 143(3) of the Act. Instead the AO confirmed the draft assessment order passed under section 144C(1) of the Act. This, therefore, vitiated the entire exercise. The Court has no hesitation in holding that the final assessment order dated 28th January, 2015 is without jurisdiction and null and void. The draft assessment order dated 28th March, 2014 having been passed in respect of entities which were not ‘eligible assessees’, is also held to be invalid.”
14. Reverting to the assessment year under consideration, we find that the Assessing Officer passed draft assessment order u/s 144C(1) of the Act on receipt of the order from the TPO. Thereafter, the final assessment order was passed after routing the matter through the DRP. As the assessee is not an ‘eligible assessee’, the assessment should have been completed u/s 143(3) instead of adopting the path of passing the draft assessment order u/s 144C(1). We find that the facts and circumstances for the assessment year under consideration are identical to those considered and decided by the Hon’ble High Court in writ petition for the assessment year 2010-11. Respectfully following the binding precedent, we set aside the final assessment order. The additional ground is, therefore, allowed to this extent.
15. In view of our decision on the additional ground setting aside the assessment order, there is no need to deal with the grounds on merits.”
There are other judgments of Hon’ble Delhi High Court wherein similar issue has been decided in favour of the assessee like in the case of, Honda Cars India Limited vs. DCIT judgment dated 17.2.2016 passed in WP(C)4262/2015 and CM No. 7736/2015; wherein the Hon’ble High Court had observed and hold as under:- “8. A reading of Section 144C(1) of the Act shows that the Assessing Officer in the first instance is to forward a draft of the proposed order of assessment to the “eligible assessee””, if he proposes to make any variation in the income or loss return which is prejudicial to the interest of such assessee. The draft assessment order is to be forwarded to an “eligible assessee” which means that for the section to apply a person has to be an “eligible assessee”.
Section 144C (15)(b) of the Act defines as “ eligible assessee” to mean (i) any person in whose case the variation referred to in sub-section (1) arises as a consequence of the order of the Transfer Pricing Officer passed under section 92CA(3); and (ii) any foreign company. 10.................................
11. In Section 144C (15)(b) of the Act, the term “eligible assessee” is followed by an expression “means” only and there are two categories referred therein (i) any person in whose case the variation arises as a consequence of an order of the Transfer Pricing Officer and (ii) any foreign company. The use of the word “means” indicates that the definition “eligible assessee” for the purposes of Section 144(C)(15)(b) is a hard and fast definition and can only be applicable in the above two categories.
First of all, the petitioner is admittedly not a foreign Company. Secondly, the Transfer Pricing Officer has not proposed any variation to the return filed by the petitioner. The consequence of this is that the Assessing Officer cannot propose an order of assessment that is all variance in the income or loss return. The Transfer Pricing Officer has accepted the return filed by the petition. In view of the which, neither of the two conditions are satisfied in the case of the petitioner and thus the petitioner for the purposes of Section 144C(15)(b) is not an “eligible assessee”. Since the petitioner is not an eligible assessee in terms of Section 144C(15)(b), no draft order can be passed in the case of the petitioner under Section 144C(1). 13.................................
In view of the above, it is clear that the petitioner, not being an “eligible assessee” in terms of Section 144C(15)(b) of the Act, the Assessing Officer was not competent to pass the draft assessment order under section 144C (1) of the Act. The draft assessment order dated 31.3.2015 is accordingly quashed.
Since we have quashed the draft assessment order, the question that the assessment has now become time barred is left open and it is open to the parties to take recourse of such remedy, as may be available to them in law.”
Following these judgments, now there are numerous judgments not only passed by the various High Courts but also by this Tribunal, wherein it has been categorically held that, if assessee is not an “eligible assessee” in terms of section 144C(15)(b), then AO is not 10 competent to pass a draft assessment order u/s 144C and the final assessment order consequently becomes time barred. Accordingly, following the aforesaid binding judicial precedents, we hold that the draft assessment order is invalid and consequently the impugned final assessment order is also unsustainable in law and is set aside. Consequently the additional ground as well as the appeal of the assessee is allowed.
12. Since, we have already allowed the appeal of the assessee on additional grounds; therefore, the other grounds have become purely academic.
In assessment years 2006-07 & 2007-08 similar facts and circumstances are permeating and similar additional grounds have been raised in both the years, that is, in these years also no transfer pricing adjustment or order u/s 92CA varying the returned income has been passed which is evident from the observation and the finding given by the AO in the impugned orders. In these years also, the AO has resorted to proposed draft assessment order u/s 144C (1) which is in absence of requisite condition that assessee was not the “eligible assessee” in terms of section 144C (15)(b). Hence, such a draft assessment order could not have been made, instead regular assessment order u/s 143 (3)/147 should have been passed. Thus, in view of the aforesaid order wherein we have followed binding judicial precedents of Hon’ble Delhi High Court, we hold that the impugned final assessment orders passed in the assessment years 2006-07 and 2007-08 are bad in law and are accordingly set aside. In these years also the appeal is allowed on the basis of additional ground raised before us and all the issues raised in the grounds are treated as academic. Accordingly all the three appeals of the assessee are allowed. 11